This is the second part of my series of articles on creative contracts. If you haven’t already, please do read my first article in this series, published in last month’s (June) edition. As I’ve already written about the background in the first articles, I thought I would dive right into other creative contract structures in this article, along with some case studies.
A conditional contract usually adopts the standard form of contract used in residential or commercial property sale and purchase transactions. One or more conditions are included in the contract which makes completion of the sale and purchase contingent on the condition(s) being satisfied.
Most standard sale and purchase contracts usually include some standard and special conditions. The one that tends to stand out more often than not is the condition that the property is sold with vacant possession on completion. There have been a great deal of cases argued in court (too many in my personal view) about whether there was in fact vacant possession of the property on completion. In one case, the buyer sued the seller for failure to provide vacant possession on completion because a couple of paint cans and brushes were left in an otherwise completely empty property!
What I am referring to with Conditional Contracts is where a specific condition or conditions are introduced into the contract because the nature of the deal is that the buyer is only willing to purchase the property once that condition is satisfied. Some of the more common ones I come across are the grant of planning permission or the seller ensuring a right of way (that may be crucial to access the planned development of the property) is expressly documented and protected or a restrictive covenant being released or extinguished or the property is built to pre-agreed specifications. The latter is commonly used by house-builders selling their new-build property off-plan or landlords letting built-to-demand property to tenant occupiers, usually for warehousing purposes.
Since a conditional contract appears very similar to an option agreement, you may be wondering why go down the conditional contract route, rather than an option agreement. The reason that I come across most often is the buyer is obliged to complete the purchase if the condition is satisfied. You may recall from my previous article that an option gives the buyer a right but not the obligation to buy the property. A seller may dislike this proposition and would prefer something more certain but accepts that the buyer is only willing to buy the property if certain conditions are satisfied. Hence, in some deals, a conditional contract is the best route to take.